What are short-term loans?
A short-term loan is a loan scheduled to be repaid in less than a year. If your business doesn’t qualify for a standard line of credit from a bank, there is the possibility of obtaining money from a bank in the form of a one-time, short term loan to finance your temporary working capital needs. However, this depends mainly on your personal relationship with your bank.
How can short term loans help you?
Borrowers consider taking out short duration loans when they urgently need money to solve an immediate financial problem. These loans are to be repaid within few weeks. This means that there won’t be any long-term debt. Taking out this gives the borrower the benefit of keeping up with repayments and handling expenses. These loans help the borrowers remain on schedule with their debt repayment because the amount is transferred via direct deposit into the borrower’s bank account and thus becomes immediately available.
Be Careful as these loans can be very expensive. However if used rarely and responsibly and repaid in full on time, they can be very effective. They also may also be suitable for small business proprietors for improving their cash flow. These are usually unsecured loans which no collateral is needed. Short-term cash advance amounts are usually low as they have to be repaid within 14 to 31 days.
There are different types of short-term loan lenders such as payday loan companies, pawnbrokers, traditional money lenders and online lenders. They offer various types ranging from payday loans to bad credit loans. Their potential borrowers are people whose payday are still a few weeks away but have urgent financial obligations to solve right there and then. They are basically used to supplement the borrower’s income until his next payday
Are there different types of loans?
There are generally two types of short-term loans offered in the financial market. These are payday loans and installment loans. Payday loans are also known as cash advances and they are due for repayment when the borrower receives his next paycheck. Installment loans, on the other hand, allow the borrower to make several fixed repayments over a few weeks or months. For both types of loans, the lender charges a fee. This fee is paid by the borrower along with the loan repayment. Usually, there is no collateral needed.
Why borrowing a short-term loan is simpler?
Applying for a loan is possible even online and is quite similar to applying for a traditional loan. This means that the borrower should provide some basic information and indicate the loan amount in writing. When both lender and borrower come to an agreement on the loan amount, the fee and repayment date, the loan amount is then transferred to the borrower’s bank account via direct deposit. Most short-term lenders accept borrowers with bad credit. The lenders base their lending amount on the borrower’s income.
Borrowing online is more convenient than obtaining a traditional bank loan. Instant short-term loans are more common online. They provide the borrower with the guarantee that he will receive a loan approval within minutes and the loan amount is transferred to his bank account within 24 hours. A variety of lenders offer such loans online, including peer-to-peer lenders.
Repayment period and interest rates
The average loans generally range from $100 to $1,000. It is important for borrowers to carefully consider the loan amount. They should not borrow more money than they really need. Sometimes, a lender may extend the loan term for up to four weeks. However, the lender usually require a repayment in no more than two weeks. There is an exception though in the case of installment loans. Although there are different offers iin the loan market with different repayment periods, it is strongly recommended that the borrowers keep the loan as short term as possible. This is because interest rates are usually at least 15% of the loan amount.
How to be responsible when borrowing until next payday?
These loans should always be used only for financing budget shortfalls and urgent needs. It is not uncommon that a loan saves the borrower some money. For example, if the borrower faces overdraft charges where the average overdraft fee is $35 for each instance of overdraft, no matter how small the amount by which the account is overdrawn, a bank customer could pay $15 for a $100 short-term loan to avoid being charged for overdraft on a small loan amount.
Taking out these borrowings could also help the borrower avoid late fees and keep a clean credit history.
What is the annualized percentage rate (APR) ?
The equivalent APR for both payday loans and installment loans range from 547.5% to 999.45%. Of course, this is based on the amount and tenure of the loan. This means that larger loans with longer payback periods have lower interest rates. It should be noted that these loans are only meant to be borrowed for a time frame of around two weeks. Annualizing other fees in the same manner results in APR of 2336% for a returned check fee of $32 against a $100 check.
What are the financial implications?
Usually, the fees for range from $15 to $40 for every $100 borrowed, up to $500. When the loan exceeds $500, the fees begin dropping. Short-term loan fees are usually smaller than other charges such as fees for a bounced check or late payment of a credit card bill.
What collection practices are involved?
Though collection practice is not only limited to short-term loans, there will be several methods of collection attempts if you’re late in repaying. The first step is internal collection which involves telephone calls and attempts to work out a payoff arrangement based on the financial condition of the borrower. If internal collection attempts fail, the lender may send the loan to a third-party collection agency to recover the outstanding amount.
What are the credit score impacts?
When deciding whether to lend you money, lenders may rely on your credit history. The borrower doesn’t have to fear that his score may be affected when his credit past is taken into consideration. Short-term lenders may use on their own scoring criteria which is based on income and ability to repay as well as payment history of previous payday loans that have been made with the same lender or with other payday lenders.
Bad credit ?
There are lenders who specialize in offering brief loans for bad credit. These loans are options for those borrowers who have a poor record of repaying, no credit check is made on the borrower’s financial past. No credit check loans provide bad credit customers with the same borrowing rights as one with a good credit history. For responsible borrowers, however, a bad credit score is always an opportunity to help them improve their credit rating provided that they make their repayments on time.